As the global financial crisis worsened through 2008, former Mexican President Felipe Calderón said he faced a series of daunting challenges, one following another.
By 2009, the United States, Mexico’s major trading partner, had fallen into a deep recession. Tax revenues shrank as falling global oil prices staggered Mexico’s oil industry. A swine flu epidemic descended on the country. Criminal violence soared that year. A drought also plagued the nation.
“We needed to act and act quickly,” said Calderón, speaking Feb. 25 at Wong Auditorium on the MIT Sloan campus.
Calderón, who was president from 2006 to 2012, said his administration infused cash into the economy and increased social services, but it also sought long-term reforms of hidebound institutions. He invested heavily in old infrastructure and education, while slashing the cost of doing business in his country, in an effort to revive and modernize the Mexican economy.
Calderón detailed the challenges he faced and his strategies for overcoming them at a special session of the Global Operations Leadership Seminar Series. MIT's Leaders for Global Operations program hosted the session. Students in the dual-degree program earn an MBA from MIT Sloan and a master’s degree from the MIT School of Engineering. First-year student Guillermo Pamanes introduced Calderón.
Calderón said he first took short-term counter-cyclical measures to prop up the economy, and increased state spending by about 3 percent of gross domestic product in 2009.
Also, to prevent mass unemployment in the export sector, Mexico worked out a deal with some of its private-sector employers. If workers would take a 33 percent pay cut in exchange for keeping their jobs, the government would pay one-third of those workers’ wages. Calderón also said he expanded, rather than cut, spending on social programs.
Global markets punished countries like Spain and Greece that didn’t embrace structural reforms during the recession, so Calderón knew he couldn’t be viewed as trying to spend his way out of tough times.
Calderón raised taxes and proposed eliminating a pair of government agencies. Mexican lawmakers rejected hacking away at bureaucratic overgrowth, but international credit markets took Calderón seriously, he said.
“I knew they’d say, ‘At least he’s trying the right things,’” Calderón said.
Facing off with a powerful utility
In an effort save taxpayer money, Calderón moved to dissolve Mexico City’s politically powerful utility and its leftist union.
Mexico was on the hook for a $4 billion annual subsidy to state-owned Luz y Fuerza del Centro. Workers could retire at 44, and there were 23,000 retirees with pensions. The union barred computers to prevent workers from being displaced by automation, so the company had a staggering 44,000 employees.
Luz y Fuerza del Centro leaders staved off change by warning they could shut off power and water to Mexico City and flood the streets with angry protestors.
Over a period of months, Calderón reached out to the region’s governor and Mexico City’s mayor. He sought to move public opinion. He labored to ensure electricity and water would flow on the day he moved against the company. He chose the day Mexican attention was fixed on a critical soccer match, part of a strategy to tamp down rioting.
Calderón dissolved Luz y Fuerza del Centro on Oct. 10, 2009. A year later, the reconstituted company’s payroll shrunk to 3,000 workers, operating costs fell 67 percent, blackouts were reduced, and the company entered into 600,000 new customer contracts.
A series of economic jump-starts
Calderón didn’t stop at squeezing out savings. He believed Mexico could exploit its location to expand its economy.
“I believe in free trade,” Calderón said. “Mexico is exactly in the center of the world.”
Under Calderón, tariffs fell by 60 percent. Mexico raised investment in roads and bridges from 3 percent to 5 percent of gross domestic product. His administration erased 16,000 regulations and slashed the number of days it took to start a business.
At the same time, Mexico moved to ensure its workforce could compete in the world. By 2012, it built 1,100 new high schools, 140 new colleges, and trained 100,000 new engineers.
Mexico expanded health care access to near universal coverage and constructed 1,200 new hospitals, Calderón said.
Calderón said his reforms and efforts to expand Mexico’s economy paid off.
Mexico’s budget deficit—without including Pemex, the state-owned oil company—was 0.6 percent of GDP. His country’s ratio of public debt to GDP was 32.7 percent—less than the United States at 87.5 percent. Mexico created 1.4 million jobs between 2010 and 2012, four times as many jobs lost in 2009. And since 2009, the Mexican economy expanded 16 percent.
Calderón said he didn’t do it alone, and told the MIT gathering of the importance of having the right team in place.
“You will face a lot of troubles, problems, challenges when you are governing,” Calderón said. “You should not ask to not have those kind of problems. [It is] more important to ask or pray to have the people around you with the talent and courage and commitment to overcome the problem.”